Auto lenders think about a number of factors when managing your loan rate of interest, including your credit rating.
In the past year, rates of interest have risen slightly for consumers with higher credit ratings, but have dropped a bit for consumers with lower credit ratings. In either case, it's still easy to get yourself a low rate for those who have good or excellent credit. This is what to expect.
What Would be the Average Auto Loan Rates by Credit rating?
Experian's quarterly State of the Automotive Finance Market takes a look at the typical car loan interest rate paid by borrowers whose scores are in various credit score ranges.
By the 2nd quarter of 2023, borrowers using the highest credit ratings were, typically, nabbing rates of interest below 3% on new cars. Car or truck interest rates were slightly higher on average, bottoming out at an average of 3.68%. This is what you can expect from auto loan rates for brand new and used cars:
| Average Car loan Rate of interest by Credit rating | ||
|---|---|---|
| Average New Car Rate | Average Used Car Rate | |
| Deep subprime (579 or below) | 12.84% | 20.43% |
| Subprime (580 – 619) | 9.75% | 16.85% |
| Nonprime (620 – 659) | 6.57% | 10.33% |
| Prime (660 – 719) | 4.03% | 5.53% |
| Super prime (720 or above) | 2.96% | 3.68% |
Note that your interest rate can also vary if you finance a vehicle purchased via a franchise dealer versus an independent dealer. Generally, franchise dealers you can get a rather lower rate with in-house financing referred to as captive financing.
How Do Auto Loan Rates Work?
Auto loan interest rates are determined through risk-based pricing. If a lender determines you're more vulnerable to defaulting in your loan from your credit score along with other factors, you'll typically be charged a greater interest rate to pay for that risk.
Factors that can impact your auto loan rate of interest include:
- Credit score and history: Even if your credit score is relatively high, you may still get a higher rate of interest should there be negative items on your credit report, such as missed payments, collection accounts, repossessions and bankruptcy.
- Loan term: The more your repayment term, the greater risk it carries for the lender—both that you might default on your payments which market interest rates may increase, making your loan less profitable than new loans. You may be in a position to score a lower rate of interest by going with a shorter repayment term. Keep in mind that shortening your loan term will even increase your monthly obligations.
- Down payment: Putting more income recorded on your vehicle purchase reduces how much you have to borrow, thereby reducing the risk associated with your loan. Consequently, a bigger down payment may lead to a lower rate of interest.
- New vs. second hand vehicle: Auto manufacturers provide many incentives for car buyers to purchase new vehicles, including lower interest rates through their financing companies. Other lenders, including banks and credit unions, may also lower their rates to compete. In comparison, if you're purchasing a used car, there is no incentive for lenders to offer lower rates, which results in higher rates on average.
- Income and debt: Lenders will consider your debt-to-income ratio (DTI), or the amount of your gross monthly income goes toward debt payments. A higher DTI may be a sign that you can't undertake any more debt without putting stress on your budget and could result in a higher rate of interest.
- The lender: Each lender has its own criteria for determining auto loan rates of interest and may have differing starting and maximum rates.
Whatever auto loan rate of interest you be eligible for a, it will be represented in the form of an annual percentage rate (APR), which may range from the price of both interest and fees. The lender uses your rate of interest to amortize the cost of the borrowed funds. Which means that you'll pay more interest at the outset of the loan's term than at the end.
How to Improve Your Credit Score
Your best bet for securing a lesser rate of interest is to improve your credit rating. Depending on your situation, though, this process may take many months or even even years. If you can't wait, taking these along with other steps can continue to help you.
For instance, you might be able to refinance at a lower rate in the future, or you can score a lower rate on your next car loan. In either case, here are some methods for you to construct your credit right now:
- Review your credit score and credit rating to determine where you stand and which areas of your file to address.
- Catch up on past-due payments to prevent further harm to your score.
- Pay down your credit card balances to take down credit utilization rate.
- Limit new credit applications to keep hard inquiries from using a compounding effect on your credit score.
- Get credit for rent, utility and streaming payments with Experian Boost®o.
- If your experience with credit is somewhat limited, use Experian Go™ will help you establish and grow your credit history. You will also get free use of your credit rating and Experian credit report in addition to resources and insights to help you develop healthy credit habits.
How to Get a Lower Auto Loan Interest Rate
Reversing your credit damage is one of the best ways to score a lower car loan interest rate. You can do that by checking your credit score and credit history to obtain a concept of which areas you have to address.
Common methods to improve your credit score include reducing credit debt and ensuring any past due accounts are brought current. While you work on building your credit, here are a few different ways you may be able to reduce your auto rate:
- Shop around: One of the best methods for getting a lesser rate in your auto loan is to compare rate offers from multiple lenders. It's a good practice to try to get preapproval and obtain rates from at least 3 to 5 lenders to get a wise decision of the items you're likely to be eligible for a.
- Apply with a cosigner: If you don't have time to improve your credit, applying having a creditworthy cosigner may improve your likelihood of scoring favorable terms. The lending company will consider both credit profiles to look for the loan's risk and your interest rate.
- Make a larger down payment: Again, putting more income down reduces how much you owe and also the loan's risk towards the lender. If you're able to afford it, consider making a larger down payment to save cash with a lower rate.
- Opt for a shorter payment term: A shorter repayment term will result in a greater monthly payment. But if you really can afford it, it might assist you to qualify for a lesser rate in your loan and lower your overall interest costs.
Consider all these options and determine the best ones based on your situation, goals and talents. And don't forget, if you do not obtain the best interest rate available now, you could refinance the borrowed funds at a later date when your credit has improved.
Maintain Good Credit for Future Auto Purchases
While enhancing your credit for your next car purchase can save you profit short term, maintaining good or excellent credit can offer even more savings over time, on future auto purchases along with other financing options.
Make it a goal to monitor your credit regularly to help keep track of your credit rating and also the different facets that influence it. Monitoring your credit will also help you spot potential fraud when it happens, so that you can address it quickly to prevent damage to your credit rating.
Also, look for different ways to save money on the price of ownership. With Gabi®, a part of Experian, you can compare car insurance rates with top providers to make sure that you're getting the cheapest premiums available to you.